Proposal would create patchwork of regulations in Colorado

DENVER, Colo. — Colorado appears poised to consider a ballot measure this November that, if passed, could lead to a patchwork of local rules for oil and gas development.

The Colorado Community Rights Network is leading a grassroots effort to amend the state constitution to give towns, cities, counties, and municipalities the ability to tighten control over local development.

Colorado Gov. John Hickenlooper said there are several variants of the proposed local control amendment, and it is too early to tell what might appear on the ballot.

An Encana Corp. rig towers over a field in Colorado.
An Encana Corp. rig towers over a field in Colorado. Encana is one of the largest producers in the state and recently collaborated with other producers and the Environmental Defense Fund on statewide standards to reduce fugitive methane emissions. Photo by Encana.

"The consensus direction seems to be that it would re-establish local control which would affect a relatively small amount of the exploration, probably 10% or 20% maximum. Much of the production and exploration that's going on [in Colorado] is in established fields where there are very positive relationships with the ranchers and the farmers and the local communities," Hickenlooper told the IHS CERAWeek conference in Houston.

The Colorado Community Rights Network submitted proposed ballot language for the amendment and must now collect 86,000 signatures and submit formal ballot language to the Secretary of State's office for the measure to be included on the November ballot.

If such a ballot measure passed, Hickenlooper said, it would set a dangerous precedent by taking value from owners of mineral rights.

"We have a whole list of retired couples who live out on the eastern plains, or sometimes in other states, for whom this is part of their retirement. They have these mineral rights that they have always counted on and [are] getting lease fees [for], but they're now getting pretty close to where it's going to be drilled and suddenly they're being told that it's being taken from them. That causes great, great concern and real anger in some cases."

Ballot measures restricting the use of hydraulic fracturing recently were passed in several Colorado municipalities, including Boulder, Broomfield, Fort Collins, and Lafayette, and several are being challenged in court. If a local control amendment passed in November it could weaken the legal case against these bans.

Wayne D'Angelo, of the law firm Kelly Drye & Warren, says in some ways Colorado has become an epicenter in the national debate over hydraulic fracturing. Some of the most highly publicized local bans have been enacted there, along with some of the most publicized challenges to local bans.

D'Angelo expects the proposed local control amendment will be watched closely. "Generally speaking, anything that creates additional support for local bans and the potential for a patchwork of regulations in the state is going to be of concern to the oil and gas industry," D'Angelo told UOGR.

The ability of local jurisdictions to regulate oil and gas development is a fiercely debated issue in the US, especially in Colorado. State regulators and the oil and gas industry tend to prefer a single, comprehensive set of statewide standards over a patchwork of varying local regulations that complicate development.

A worker monitors operations on an Encana rig in Colorado. The producer is operating six rigs in the DJ basin, up from two rigs in 2013. Photo by Encana.
A worker monitors operations on an Encana rig in Colorado. The producer is operating six rigs in the DJ basin, up from two rigs in 2013. Photo by Encana.

Like any other industry, oil and gas operators require regulatory consistency in order to operate successfully, said Doug Hock, spokesperson for Encana Corp.

"An initiative giving local governments the right to veto our ability to operate creates an uncertain business climate and puts Colorado at a distinct disadvantage when it comes to energy development," Hock said.

Encana holds that the state is in the best position to be the primary regulator of development and provide regulatory consistency.

If a local control amendment makes it on the November ballot, Hickenlooper said, it would be divisive and difficult to pass. He prefers to see the oil and gas industry address local community issues, where they exist, and have both parties seek a compromise—although, he conceded, he knows from experience that this could be difficult in some areas.

Reaching a compromise

Hickenlooper has been working to strike a balance between the needs of the oil and gas industry, private citizens, and environmental groups. Under his leadership, Colorado recently became the first state in the US to limit methane emissions from oil and gas operations.

Rules adopted in February by the Colorado Air Quality Control Commission will reduce emissions of methane and volatile organic compounds (VOCs) through the cycle of oil and gas drilling, production, and transportation. The rules require operators to routinely inspect for and repair methane leaks and install technology to capture 95% of emissions of VOCs and methane.

The methane restrictions were the result of collaboration between industry and environmental groups that was encouraged by the state. Noble Energy Corp., Anadarko Petroleum Corp., and Encana, three of the state's largest oil and gas producers, worked with the Environmental Defense Fund to draft the rules.

Hickenlooper said the state government acted as an unbiased facilitator in these discussions. "Government, I think, has to be the fair witness—to really not take sides and say, ‘All right, how do we get to the cleanest air, at the lowest possible cost, with the least amount of bureaucracy and red tape?'"

But while the effort was an example of industry and environmentalists working together, D'Angelo said this does not necessarily mean the groups are in agreement.

"Some people saw getting ahead of the methane issue as a step to potentially head off efforts to outright ban hydraulic fracturing in other areas," D'Angelo said.

Meanwhile, he said, other members of industry viewed the methane rules as potentially problematic and figure implementing the measures could be more costly for producers than state estimates suggest. The Colorado Department of Public Health & Environment estimates compliance would cost the industry about $30 million/year.

Continuing investment

Despite the prospect of further regulatory hurdles, operators plan to continue making sizable investments in the state, which includes portions of the Denver-Julesburg basin, the Piceance basin, the Niobrara shale, and Wattenberg field.

Noble Energy has allocated $2 billion, or about 40% of its capital spending budget, to the DJ basin in 2014. Anadarko Petroleum, meanwhile, has said its horizontal drilling program in Wattenberg field generates the strongest rates of return in the company's onshore US portfolio and expects to see strong production growth there this year as infrastructure expansions come online.

Anadarko plans to operate 13 rigs and drill more than 360 wells in Wattenberg field in Colorado this year.

WPX Energy increased its budget for the Piceance basin in Colorado to $475-495 million in 2014 from $340 million in 2013, as the company works to increase production and delineate its position in the Niobrara shale. Two rigs will be added to the company's Piceance basin drilling program this year, bringing WPX's total number of operated rigs in the basin to nine.

Encana is ramping up in the DJ basin and increased the number of operated rigs working there to six this year from two in 2013.

Oil and gas development plays an important role in Colorado's economy, directly employing over 50,000 people. A study by the University of Colorado's Leeds School of Business found the oil and gas industry generated $29.6 billion of economic output in Colorado in 2012 and directly contributed almost $1.6 billion to public revenues, about $500 million of which went to education.

EIA data show Colorado is the ninth largest oil producing state in the US, producing 178,333 b/d of crude in November 2013. The state also ranks as the county's sixth largest gas producer.

Although, Hickenlooper said, there is a portion of Colorado's population that is dead-set against hydraulic fracturing, most people understand oil and gas play an important role in the state economy. Many residents, he said, are not necessarily opposed to fracing and are instead concerned more generally with industrial activity taking place close to their communities.
"As long as we are rigorous in our wellbore integrity and make sure there is no communication around the wellbore, [hydraulic fracturing] is a process that can be done very safely," Hickenlooper said. "We've been working to get that information out. I don't think the antifracking [community] is as loud a voice now as this concern over zoning and local impact."


Correction

Cabot fuels Marcellus operations with gas
The figure "Estimated savings from diesel displacement" in the January/February edition of UOGR was created based on data provided exclusively by Environmentally Friendly Drilling Group, and not Prometheus Energy Group, Inc.

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